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office of accounting simplification. Doesn't surprise me. They are obviously not getting anywhere with tax simplification so they have to do something to justify their existence.

Has it not occured to them that a very small entity probably works on a cash basis anyway. I have many small business where there are no accruals simply because there aren't any.

Talking of trading under thresholds. With some clients they purposely trade under the vat threshold for obvious reasons. To me that is good tax planning. I really don't think any business would keep their turnover low so they could do 3 line accounts another HMRC myth.

...to @johnjenkins that the OTS might actually know what they are doing?

Instead of implying that they are stupid he should note that they have been out on the road and have spoken with hundreds of accountants. They specifically asked for views on this issue and their report reflects the majority views that they received in countless discussions. I attended one of the meetings and was impressed by the quality of the discussion, the common sense spoken by the accountants who contributed and the absence of armchair argument. There wasn't unanimity on any points I don't think, but a good educated and informed discussion was mutually beneficial.

The Chartered Institute of Taxation (CIOT), of which OTS policy chief John Whiting also happens to be tax plicy director, has welcomed the OTS recommendations. The institute said the proposals could help reduce burdens and errors and the need for interventions such as Business Record Checks (BRCs) by HMRC. This would be a win for those taxpayers, HMRC and all other taxpayers who fund HMRC.

Andrew Gotch, Chairman of the CIOT’s Owner Managed Business Sub-Committee, said: “Moving to a simpler receipts and payments basis makes sense. It ties in with the discussions the CIOT has been having with HMRC on Business Record Checks. HMRC often try to make accounting sound simple and tell businesses to record ‘money in and money out’ yet current tax legislation actually requires them to go further, by using full UK GAAP (Generally Accepted Accounting Practice) rules. We can understand the recommendation that this should only apply to the very smallest businesses initially, but if introduced we’d like to see the low limit kept under review, with a view to seeing if there is scope for aligning it to the VAT threshold in due course.

“We would also be interested in exploring a flat rate scheme based on turnover. The principle has worked well in the context of VAT and is easy for business to understand. This could have the potential to reduce the need for enquiries and Business Record Checks as only income need be recorded. The corresponding simplification of the expenses regime would also contribute to making record keeping easier. “

Gotch went on to urge other improvements including training staff in technical matters and making HMRC’s website more user-friendly by improving the search function.

“Two-way email communications between HMRC and taxpayers, provided reasonable data security concerns are addressed, would be a big step forward. So would making all forms submittable online,” he added.

On disincorporation relief, Gotch commented: “Many small businesses incorporated in the early 2000s when the then Government provided tax incentives to do so. Many are now stuck in an unnecessary, inappropriate and burdensome corporate structure and need a way out that does not have penal unfunded tax consequences. The proposals seem a sensible balance that provides a simple yet limited relief which does not therefore require extensive anti-avoidance provisions.”

it would appear that we have a situation that has been created by HMRC (the thinking that most business keep incomplete records and make loads of mistakes that Accountants don't pick up on or aren't bothered about) and now (due to the cost of these investigations and very little yield because they got it wrong in the first place) they want to use "cash accounting" as a "get out of jail" card.

Tell me John what do you do with cash deposits at the end of the year. I presume under cash accounting you would have to pay tax on them.

VAT is totally different as it is a transaction tax not a profit or gain tax.

Added to which if it's all cash then make it so. Who could ever prove that more than £30k was received can you imagine HMRC trying to reconcile that one ? Probably ask to see the invoices and the diary Ha ha ha. Would we refuse as not needed to calculate tax due ?

How about a client that has invested in sage, are they going to have to buy an upgrade or are we going to have to charge extra to convert it all back to cash accounting.

The advice has to be the same as the tax office advice.........."You are too small to need an accountant and so long as to put a few sensible numbers on your return and declare some of the cash you will be o.k."

On the bright side it is good that the honest should be entitled to the same tax advantages of your local drug dealers !

It is quite ludicrous that a trader who is registered for VAT can elect, with turnover of up to £1,300,000 to use the cash basis to determine his VAT returns and yet a window cleaner on a turnover of £15,000 must at present use full accounting standards to return his income to HMRC, unless he specifically adopts FRSEE. If you think this is exaggeration look at the Smith v HMRC case a year or so ago where a builder was accounting for income on the basis of architects completion statements produced by clients but his accountants were held to be negligent in not using SSAP9 etc - negligent because it then justified HMRC raising discovery assessments over an extended time period. The two Tribunal judges were both Chartered Accountants and revelled in displaying their knowledge of accounting standards and their development as well as the obligation to use them in full for taxation purposes.

Surely if you can elect to use a cash basis for VAT you should be able to elect to use a cash basis for IT/CT so that only one set of records are necessary?

Which very few preparing their own tax returns would even know about let alone understand.

the easiest and most cost effective way of fairly calculating tax due on profits is by an invoiced based income and expenditure account !!! (two lists).............. not a nasty bank reconciliation that few can manage either !!

If we move to a receipts and payments basis then we will see major distortions as traders will try to stock up and pay suppliers in advance before their year end but try to hold off receiving or banking sales until the day after. There will be scope for engineering profits to create losses etc. The accounts will be meaningless as the margins will be all over the place and so no use to anyone. Like the VAT Flat Rate scheme, hardly anyone uses it for simplification, only if they save money. We will also have yet another set of rules to deal with and complexity relating to the transition between one basis and another.

If it ain't broke, don't fix it. But the ideas of reducing disclosures in accounts and flat rate expenses have some merit.

The biggest thing the Govt could do for small businesses is scrap most of the H&S and employment law nonsense.

The proposals are aimed at micro businesses who do not use accountants and who don't understand what is meant by GAAP.

There is unlikely to be a loss of tax in most cases because already lots of people are cash accounting and hold minor amounts of stock or WIP and so there may be a timing difference which is going to balance out in the following year.

It may be confusing when your business grows and you have to change over to GAAP, but hopefully then you will see the point of using a professional adviser(!). So it is not all doom and gloom and we have afterall had VAT cash accounting for some time now and that seems to be the model that is being followed.

This isn't simplification: introducing new rules, new threshholds, new opt-outs or opt-ins, new categories of qualifying and non-qualifying businesses introduces complication and just a) gives new opportunities to scammers and the plain dishonest, and b) makes life harder for everybody else.

Simplification should be about chopping away at the undergrowth of forms, regulation, threshholds, different treatments, options. It shouldn't be about getting rid of the one leylandii in a whole forest of them and then immediately planting another!

We are still waiting for real tax simplification. The full integration of employees NIC into income tax is long overdue, and at a stroke would make IR35 redundant. Allowing income-sharing between spouses (or civil partners) would remove most of the uncertainties of the settlements regulations. Abolition of employers NIC (if the revenue is required, then collect it through adjusting income tax rates perhaps) would give a huge employment boost.

Allowing cash accounting for small businesses is welcome but really a minor issue. As a small business owner of many years I have done my own accounts and see it as no big deal - as one of the comments above pointed out, accounting on an accruals basis is in any case a non-event if there aren't any accruals.

Provided SME's are charged a reasonable fee by accountants, we should keep the current accounting rules. All those arguments about SME's not understanding the system are irrelevant if they can afford an accountant.

If you don't want to get the advantages of accounting properly, or don't want to pay for it, DON'T join the system!

I find that the simplest possible bookkeeping system for VAT is cashbook based - a column in a cashbook - every business, as a minimum, should run a cashbook. Daybooks and ledgers (for invoice based VAT accounting) is a stage further of extra complication.

So for VAT at least cash accounting is most certainly better.

Problem with Income Tax to be based on cash accounting is that to prevent abuse no doubt there'll be complex rules required - and complex rules is NOT simplification - like flat rate VAT scheme...a simple scheme but extensive guidance necessary and lots of queries / VAT appeal cases because ALL IS NOT SIMPLE.

One big advantage of this for your average "small" client is that you will no longer have to explain the difference between "cashflow" and "profit".

A common question/gripe amongst many of my smaller clients is why they have to pay tax on "income" they haven't received.

Many clients have their "profits" tied up in debtors and/or stock & work in progress and do not understand "accounting concepts". As far as they are concerned if they have not received their money then they should not be asked to pay tax on it!

As most people are aware, it is more often not the lack of profitability that kills a business but the shortage of cash to pay the creditors, of which HMRC are particularly quick of the mark these days to start threatening to bring in the bailiffs!!

If their tax liability is calculated on a cash basis then it will be easier for clients to accept that when they receive settlement of an invoice they should put aside a set amount to pay the tax that will become due on it.

That's interesting and I can see that that's very straightforward and simple and would work for very small enterprises.

For many years now I've worked with SMEs with turnovers in the low £100ks, often with multiple VAT rates on sales. I find cash accounting in these circumstances much more complicated than standard accounting. And just try reconciling VAT in the BS in Sage at period end!

Black holes in the finance, tax and everything else are perfectly normal in their world.

The important thing to do is move forward and create the next muddle before the last one unravels !!! The modern way !!

The real beauty of invoice accounting is you know when you have been paid and how much is owed to you, or vice se versa although perhaps this does not matter any more now that your money can disappear into accounts unknown with internet banking.

your comment Adacon with total agreement. It must be our age group that still have common sense because if the CIOT are "welcoming" this proposal instead of having a pop at the OTS for coming up with such a whimpish "simplification" then we are all doomed to stay in this quagmire of tax abysmality for years to come.

Er, quite simply that the OTS and their report that you berate reflect a wider range of views than yours. You're entitled to those of course. But they are evidently a minority. That's all.

As to those who ask why OTS is considering 'accounting issues' - surely it's obvious. It's because the TAX LAW requires profits to be computed in accordance with GAAP. Research shows that the vast majority of micro-entities do NOT have accountants and do NOT understand GAAP.

The OTS paper is a common-sense approach to simplify the position and I support it.

Most small entities that do not use accountants miss out on reliefs that far exceed the accountancy fees or underpay tax where the penalties would exceed the accountancy fees.

Saw a new client yesterday had paid £150 for accounts ? and tax return to internet advisers? / data entry wallers ? Everything that could be wrong was ! Overpaid tax by estimated £1100 and has a tax bill on money he never had.

Tax return requires amendment and the lack of advice cost him another £1000 a year.

The way to get peoples tax right from everyone's perspective is to engage a competent accountant................no matter how simple you think you make it most that don't understand now will not understand later either.....just in the same way that they were no good at maths when they were at school.

A few rules sort the wheat from the chaff making incompetent advisers and tax evaders easy to spot.

It is not just about filling in the form ! It's what you see when you are doing the compliance bit that really helps. Very often the stuff we give away for free is the most valuable.

Not only do I challenge these mythical research findings about the vast majority of ME's not having an Accountant, I find your comments that my views are a minority have been proved sooooooooooo wrong by the comments made on this thread. It would appear that agreement comes from those who generated this "simplification" in the first place.

Basically, Mark, most Accountants don't need the OTS offering advice on what we would do normally.

I have no doubt the OTS is made up of knowledgeable people which makes it even more frustrating when all they come up with is this sort of stuff without tackling the REAL issues. Perhaps the OTS is just another PR exercise and they aren't allowed to do anything worthwhile.

Nice to see such variation in viewpoint. Still can't see why someone who elects for cash basis for VAT shouldn't be allowed to use the same basis for all taxation liability. Would there be an enormous amount of fiddling, end of year adjusting - well I suspect that the answer to that is two-fold? Before 1992 when the Threlfall case first suggested the GAAP could be the basis for determining liability I suspect that the vast majority of small businesses did produce their accounts on a cash basis. Whilst there is some scope for avoidance with profits at or about the thresholds, in the long run it is largely a timing difference and no more. And the second? How many small businesses are not only not using GAAP but their "accountants" and "tax advisers" aren't using GAAP either - as long as there aren't large accruals it probably makes very little difference, but just how many of those who are in favour do use GAAP in full, and where they simplify arrange for then client to elect to adopt the FRSSE? Fail to do so, use a slightly modified form of accrual as Smith did in his case (Smith v HMRC - UTT) and you, the accountant, will be found negligent.

putting accounts together in the mid 60's. I was taught to accrue, have done ever since. On smaller entities as long as there were 4 phone bills etc. then no accrual was made. This is what the big boys call "material". Again I was taught to agree the bank "to the penny" but the big boys will write off a small difference if it is not "material". There comes a time where an Accountant has to weigh up cost against 100% accuracy and normally experience will form the basis of this decision. So we really don't need the OTS saying we recommend that what most accountants are already doing should be formally accepted by HMRC as a "simplification".

.Is to those who ask why OTS is considering 'accounting issues' - surely it's obvious. It's because the TAX LAW requires profits to be computed in accordance with GAAP. Research shows that the vast majority of micro-entities do NOT have accountants and do NOT understand GAAP.

The OTS paper is a common-sense approach to simplify the position and I support it.

Mark

The vast majority of micro entities DO HAVE accountants that play a vital role in the survival of those businesses.(however small and insignificant)

The OTS paper is not common-sense and seems to have been prepared by those that have perhaps never been anywhere near a micro entity.

Their simplification is not a simplification.

The bank ins and outs are the bits small clients get wrong and the time consuming accountants bit too....why do you think we revert to an invoiced based Income and expenditure account for cheap and cheerful. The simplest and most cost effective thing to do for small business is STOP changing the rules every two minutes even the gimmes are a headache for a small entity.

I do wish someone who worked with and understood Micro entities and their issues was consulted on these matters.

Perhaps when no profit appears on a cash basis (because it is held in stock and debtors) you will advise to cease trading ? Because that would be the simple thing to do ? or if you have cash in the bank because there are creditors unpaid (have a holiday)

I used to like the source and application of funds statement which helped explain a clients business cash flow to them.....But they got rid of this because it was useful.

Also don't forget that proprietors of micro businesses frequently need accountants reports for lending purposes. I foresee that a simple cash method will cause major problems here. For example, for a business carrying stock and debtors could show a low annual cash profit as the proprietors deliberately build up stock etc in order to engineer their taxable income down . Result being that they do not get their mortgage without us having to redo the accounts on an accruals basis.

I don't have the time I'm afraid to dig out the stats re the number of self employed people filing returns or the number of taxpayers who file using accountants. I'm sure the data is available. But it's also pretty obvious simply by comparing the number of small businesses (c4.8m) with the number of accountants and the av number of clients they have. It's simply not credible to suggest that the majority of the smallest businesses use an accountant.

The OTS report also reflects the experiences of HMRC in dealing the large volume of small business tax returns from unrepresented taxpayers.

I've picked out some direct quotes below. It's the first time I've looked through the final document. It addreses all of the points above and explains the rationale for the conclusions reached. Makes me wonder how many of the critics above have taken the time to check it out.

It should be emphasised that in this work we have been concentrating on the very smallest unincorporated businesses. These are businesses:

- with turnover of £30,000 or lower;

- with little or no significant capital investment;

- normally not registered for VAT; and

- probably with no employees.

These businesses are often simply a e person carrying on a trade or profession.They will often not have the help of a tax or accounting specialist

Our research indicates that “cash accounts” are already widely used, which demonstrates that businesses find this method easier and less time-consuming to use.

The conclusions are based on feedback from the discussion paper published in July 2011, a research project carried out by The Futures Company (TFC) on behalf of the OTS and survey evidence from members of the Federation of Small Businesses (FSB) and tax agents for small businesses. This information has been taken together with views obtained in a series of meetings around the country over the last 18 months and the input of the consultative committee. Our work has also been informed by insights we have obtained from reviewing tax simplification in other countries.

Based on the evidence collected, the recommendations in this report have the potential to bring long term benefits to the small business community. In our view, these benefits would outweigh the transitional costs and provide greater certainty and simplicity for between two to three million small businesses in the UK

At the start of 2011, there were over 4.5 million businesses in the UK. Of these, nearly 75% were unincorporated. These unincorporated businesses are concentrated at low turnover levels: over 35% of all businesses with turnover below £20,000 are unincorporated and over 60% with turnover below £70,000 are unincorporated.

Approximately 30% of sole traders or partnerships with turnover below £30,000 did not pay any income tax or class 4 NICs in 2009-10. Less than 10% had a tax liability above £5,000. [Hard to believe the majority of them can afford to pay for professional advice]

1.7 In making these recommendations, we emphasise that the OTS is not devaluing the management information provided to small businesses or the assistance they receive from the accounting profession. We are, however, mindful of the number of comments we have received which state that too much of the work that is undertaken for the smallest businesses is for the purposes of taxation alone.

1.8 Clearly many businesses will want to have accounting assistance for reasons other than tax; for example to help ascertain profit, to provide management information or to help with obtaining finance. However, where there is scope to remove the mandatory requirement for work that is not necessary for some businesses, we think that is a goal worth pursuing.

1.9 Furthermore, reducing the time and cost spent dealing with tax obligations will allow businesses and their advisers more time to devote to the success of the business.

Then what are these costs associated with getting their accounts wrong ?

not vat registered ? mmm Says it all I wonder how many would have benefited from advice.

Don't forget some (quite a few) of these businesses are in fact employees.

I usually save more than the fee on these cases so the client often gets the compliance for free !!

You have also to read statements by the OTS with the spin that has been placed on the statements. My point would be if you use flawed management information you will come up with a silly decision which is clearly what has happened.

"They will often not have the help of a tax or accounting specialist". No but they probably will have had the help of an Accountant. If cash accounts are widely used - which is what a lot of us have already said - why is OTS getting involved, have they nothing better to do? "This information has been gathered fron views and insights from other countries" - what Greece?

Let me put a very simple question to you Mark.

You are a ME earning less than £30k a year. You do your own accounts and have a tax bill of £5k. Your mate earns more or less the same but has an Accountant and pays £3k a year. How long before you go an Accountant?

I think the OTS have wasted public (our) money on this farce and it's about time them, together with WT are outed to make way for, hopefully the best thing since sliced bread, Agent strategy.

I accept you're not going to change your mind John. Nor am I likely to do so as my view is formed by reference to the facts rather than my preconceptions.

I invariably start with an open mind and am always willing to be convinced by the facts. I also tend to avoid criticising others by ref to my preconceptions. There are plenty of times that my instinct has told me that HMRC, Treasury or one of the prof'l bodies has been wasting their time. Then i read the exec summary (or more)of their report. If I still feel like being critical I will be. More often I find that I was missing part of the story as I don't know everything nor do I pretend to do so. But that's just me.

A bit like if you turn up you now get a GCSE as no one fails...or if you cant manage a real degree we will make up a mickey mouse one so everyone can have a degree.

Now if you cant be bothered to get your tax right we will make that o.k. too !

They will still get it horribly wrong as they will still not read the rules !

Perhaps everyone should be given the same numbers so they can copy on to their tax returns.....and some will still get that wrong ! You may as well make up some random numbers you think are appropriate.

Miss entire sources off their return and even don't pay class 4 NIC......I would go further and estimate that there would be an average loss of tax of at least a £1000 a year. (fill your tax gap that would ?) HMRC has always turned a blind eye to this

I agree with John the whole thing is a complete waste of resources and about bread and circuses rather than anything useful that would help the economy.

I'm sorry Mark but I have read your posts a few times and they are not based on FACTS they are based on views and insights. Ill go further. I challenge anyone who was contacted by the OTS on this subject to tell us what was said!

There is no way of telling who actually puts their tax returns in without some sort of help.

By the way my preconceptions are current conceptions based on 47 years experience and communication with the business world.

Very small businesses can often have an accountant prepare working papers, often an A4 sheet with a few photocopies, and tax return during a meeting lasting no more than an hour. Subjective and indistinct hearsay claims of “often” don’t necessarily equate to the majority of businesses, nor a material proportion in terms of numbers.

Accruals, consistency and prudence are three of the original/real/true/actual accounting principles that would be directly undermined by introducing “cash accounting”. A supposed convenience is not a credible justification for undermining fundamental accounting principles.

Where is the claimed certainty for a small business when their accounts are not prepared in accordance with accounting standards? Will the bank/finance/mortgage company even accept them? HMRC Officers on the ground won’t want it, but if politicos accept it then enquiry/vat officers will have a field day in terms of penalties; incurring a lot more work and diverting their time from higher value/risk taxpayers.

Introducing more rules is complication, not simplification.OTS is another public relations exercise, something I suspected from the start and which was confirmed when serious changes to the tax system were blocked.

Although I am against this "simplification" in principle, I can see how it would work better for the real micro businesses with turnover of around £30k. After all, they don't usually have many accruals and prepayments in the first place (and those that do exist are tiny).

However, if they don't have accountants, it will probably just be the status quo for them anyway (so no real reduction in their time or costs), whilst those who do have accountants and prefer to have real accounts will probably prepare them the same way as they do now (so no reduction in their time or costs either).

But how long would the limit remain at £30k? You can bet that it would go up all the time as politicians clamour to show us how much they're reducing the admin burden on small business (whilst they increase the real burden constantly with more and more petty rules).

More likely, if the EU think that a micro business is one with turnover up to €700,000 and 10 employees, the Government is bound to set a figure nearer that level instead.

I think the potential for tax avoidance on a grand scale will gradually become obvious (and be blamed on accountants). What is now window dressing of accounts and hence tax evasion will become legitimate tax avoidance, and whilst it will be negligible for the real micros, it will cost billions if the official micros start doing it too (as they inevitably will).

Then we will come full circle and they will have to reinstate real accounts for tax purposes, so we will have even more differences between taxable profit and accounting profit than we do now (but with no deferred tax to reflect it in the accounts).

Real accounting will remain for businesses which need bank finance or other external investment, as no way will the lenders rely on the cowboy accounts required by the EU. So those firms will end up with 2 sets of books - one for the authorities and another for their investors.

I see there is going to be an automatic presumption that such accounts will show "a true and fair view". So having already corrupted the word "fair" to suit their own ends in general usage, the politicians are now going to make it a contradiction in terms for accounting purposes too.

The whole exercise is just a PR stunt dreamt up by politicians desperate to show that they are doing something to help small businesses, and by bureaucrats who don't even know what an accrual is and so think it doesn't matter.

One last point - if these proposals do come in (and they seem to have a head of steam behind them) what are they going to call "profit"? Surely they wouldn't have the gall to bestow the word "profit" on a bottom line based purely on cash.

It wasn't that long ago they got rid of it for barristers and don't want it again.

The freedom to fudge profits? No way!

I am sure many HMRC Officers at higher levels, those politically motivated staff well in with the blue sky thinking and the wise monkey school of management, will comply with any request; hover ridiculous.

The facts to which I refer are the details contained in the report and recommendations and the evidence to which they refer. A bit like I accept man went to the moon even though I wasn't there....

In terms of who the OTS asked - I have already noted that I attended one of the many meetings (at which there were a dozen or so practitioners present). They shared their views and some started from the same perespective as you. Their views tended to be impacted however by the additional facts reported by John Whiting and his colleague.

Although I am against this "simplification" in principle, I can see how it would work better for the real micro businesses with turnover of around £30k. After all, they don't usually have many accruals and prepayments in the first place (and those that do exist are tiny).

The accruals or matching concept is about matching costs with revenue not a few accruals or prepayments. A cash based system will have your profits going all over the place and to make it fair perhaps an averaging relief claim could be introduced.

This WILL lead to a loss of / wasted personal allowances etc etc. MORE taxation under the spin of simplification.

In my youth we had a description which aptly described the accounts prepared by small sole traders - the excess of income over expenditure - a very honourable accounting concept that goes back many, many years.